How And Why Does Positive Engagement Work?

Many fund managers now use positive engagement as their primary strategy to force a company to improve it's policies.

The main idea behind positive engagement is a simple one: upper
levels of management, including chairmen and presidents of companies,
have to take note to the opinions of their 'owners' - the shareholders.
In normal terms, for a small shareholder to voice an opinion with a
director of a FTSE or NASDAQ firm would be impossible - but if your fund
ownes several percent of the company's issued stock they will listen!

In the past, such opportunities with directors were really only
used for a regular update as to the trading conditions and performance
of a company and market. However, as time has moved on, so has the power
of a fund manager. These days, a high profile fund manager can make
life very difficult for a director who opposes fund policies - and this
includes ethical policies.

Rather than exclude a company with a poor environmental or social
record, many fund managers are now taking the unusual step of
purchasing blocks of shares so that they may influence company policy
from within. In reality, they are amongst the few people who really can
influence these policies.

Therefore, these fund managers are trying to prevent problems
from getting worse and force positive change. This differs significantly
with how we would deal with such issues in the past. Previously, change
would only be forced on a company after a significant event which
shocked those involved - oil spills from ocean going tankers is an
obvious example. Why should oil tankers only be improved for reasons of
safety AFTER an accident and oil spill?

In ways like this, a fund manager can be a powerful ally of the ethical
cause and is able to effect massive change if given time.

Traditionally, these 'activist' shareholders and fund managers
have been interested in improving the business performance. This might
mean selling the company to release capital to shareholders, selling an
underperforming part of the business, removing the management team
(often for alleged incomepetence) or as a part of hostile takeover.

A great example of the role of the activist owner can be seen in
the role of Gordon Gekko in the movie Wall Street. Michael Douglas plays
a corporate raider trying to break up a company to make millions in
profits for himself. In the real world, a great modern example of the
activist shareholder is
Carl Icahn
- a man that strikes fear into boardrooms across America.

It is simply this concept, but used for either environmental or
ethical purposes, that positive engagement is built on. Ignoring a
shareholder like Icahn is something that many boards might like to do
and simply describe them as 'greedy' or a 'troublemaker'.

In contrast, it is very difficult to dismiss an
activist
charity or NGO whose main aim is protecting human rights or the planet
without appearing to be cruel or uncaring. No President, Chairman or CEO
wants to be portrayed as cruel or uncaring!

It is this psychological leverage that NGOs and charities use to lobby corporations to have more friendly policies, processes and procedures.